**Written by Doug Powers
I’m guessing we could be about to experience a really short “year” in Berkeley:
Carol T. Christ, UC Berkeley’s 11th chancellor and the first woman to lead the nation’s top public research university, unveiled plans Tuesday for a “Free Speech Year” as right-wing speakers prepare to come to campus.
Christ said the campus would hold “point-counterpoint” panels to demonstrate how to exchange opposing views in a respectful manner. Other events will explore constitutional questions, the history of Berkeley’s free speech movement and how that movement inspired acclaimed chef Alice Waters to create her Chez Panisse restaurant.
And if Berkeley’s new chancellor keeps talking like this she’s going to get chased out of town faster than Ann Coulter disguised as Milo Yiannopoulos reading aloud from a David Horowitz book:
She drew loud applause when she asserted that the best response to hate speech is “more speech” rather than trying to shut down others, and when she said that shielding students from uncomfortable views would not serve them well.
“You have the right to expect the university to keep you physically safe, but we would be providing you less of an education, preparing you less well for the world after you graduate, if we tried to protect you from ideas that you may find wrong, even noxious,” she said.
The No Vacancy signs might soon be lighting up outside campus safe spaces everywhere (not to mention a “vacancy” sign outside the chancellor’s office).
**Written by Doug Powers
Steve H. Hanke
1. Question: What were the two greatest economic catastrophes in the U.S. of the last 100 years?
Answer: The Great Depression (1929-1933) and the Great Recession (2007-2009). It is worth mentioning that most Americans date the start of the Great Recession as 2008, when Lehman Brothers collapsed. In fact, the crisis started on August 9, 2007. That’s when France’s BNP Paribas barred investors from accessing three money-market funds that had subprime mortgage exposure, citing a “complete evaporation of liquidity.” With that, Northern Rock, a bank that was formerly a building society, started to wobble, and eventually faced the first bank run in the U.K. since the Great Depression. This solvent institution eventually collapsed because the bank of England failed to make “lender of last resort” loans efficiently and promptly. This fiasco was clearly the result of government, not market, failure. These troubles eventually worked their way across the pond.
2. Question: What did the Great Depression and the Great Recession have in common?
Answer: Huge economic slumps accompanied both. Also, the diagnoses and prescriptions were the same. Both catastrophes were laid at the feet of market failure (read: the capitalist system is inherently flawed and prone to failure). To correct for the alleged market failure associated with the Great Depression, Roosevelt came up with the New Deal. In short, the prescription was a massive increase in the scope and scale of the government’s reach and involvement in the economy. This type of intrusive response has also followed the Great Recession, ushering in a plethora of government regulations, particularly those that affect banks and financial institutions. And why not? After all, the politicians told us that banks (and bankers) caused the Great Recession (read: market failure).
It is interesting to note that about the only ones who are happy about Dodd-Frank and the 1000s of regulations that it has given birth to are the members of an unholy alliance: the bank regulators and compliance officers. Yes, Dodd-Frank has produced “jobs for the boys!”
3. Question: Why were the diagnoses of and prescriptions for the Great Depression and Great Recession so completely wrong?
Answer: For a diagnosis of the course of economic activity, one needs a model. So, just what determines national income? What is a reliable model? Well, money dominates. The quantity of money, broadly defined, will set the course for nominal economic activity (read: real growth plus inflation). The chart below shows that, in the major economies of the world, there is a rather tight relationship between the growth rates in money, broadly defined, and nominal GDP growth.
If we apply a monetary approach to national income determination for the Great Depression, we find that the money supply, broadly measured (M3), plunged by 40% in the 1929-1933 period. Milton Friedman and Anna Schwartz, in their famous work, A Monetary History of the United States 1867-1960, showed just how the blame for the Great Depression can be laid at the doorstep of the Fed. Yes, it was a central bank, a government institution, that was the cause of, and should have borne the blame for, the Great Depression.
Never mind. The Federal Reserve (the Fed) was not blamed at the time. Instead, capitalism was fingered, and in consequence we had the New Deal. Misguided government policies not only caused the Great Depression, but also resulted in a deeper and longer depression. As Robert Higgs summarizes in his book, Against Leviathan: Government Power and a Free Society, Washington D.C. compounded the monetary problems generated by the Fed. The New Deal created regime uncertainty. In the words of Higgs:
Roosevelt and Congress, especially during the congressional sessions of 1933 and 1935, embraced interventionist policies on a wide front. With its bewildering, incoherent mass of new expenditures taxes, subsidies, regulations, and direct government participation in productive activities, the New Deal created so much confusion, fear, uncertainty, and hostility among businessmen and investors that private investment and hence overall private economic activity never recovered enough to restore the high levels of production and employment enjoyed during the 1920s.
In the face of the interventionist onslaught, the U.S. economy between 1930 and 1940 failed to add anything to its capital stock: net private investment for that eleven-year period totaled minus $3.1 billion. Without ongoing capital accumulation, no economy can grow….
The government’s own greatly enlarged economic activity did not compensate for the private shortfall. Apart from the mere insufficiency of dollars spent, the government’s spending tended, as contemporary critics aptly noted, to purchase a high proportion of sheer boondoggle.
In the Great Recession, we witnessed the same pattern as we did in the Great Depression. The money supply, broadly measured (M3), was growing at a year-over-year clip of 17.4% in March of 2008. From that peak rate, it plunged to a negative 6.1% (yr/yr) in June 2010. With this plunge in the money supply, nominal GDP plunged, too. Both inflation and real growth came down hard—not because of market failure, but because of government failure.
4. Question: What were the contours of the key markers in the Great Recession?
Answer: Like the Great Depression, the government was quick to blame flaws in the capitalist system and the alleged excesses they created. Bankers and banks came in for a thrashing. To make the economy safe from these alleged culprits, the Dodd-Frank legislation was passed, Basel III was imposed, and a plethora of other regulations and mandates were introduced to the financial industry.
How did such a misdiagnosis occur? By ignoring the monetary interpretation of national income determination, the “Doctors” will always misdiagnose. Let’s look at what was happening: In the July 2008 - November 2008 period, the U.S. dollar soared by 25% against the euro, the price of gold plunged by 19%, and the price of oil dropped by 57%. Also, the consumer price index went from its elevated level of 5.6% per year in July 2008 to 0% in January 2009, and further dropped to a negative 2.1% in July 2009. All these price indicators should have signaled that the Fed was way too tight with the money supply reins during the early phase of the Great Recession. But, Chairman Bernanke and his colleagues, the central bank, failed to act. This does not represent a case of market failure. No. It represents government failure—the application of a misguided set of pro-cyclical economic policies.
For a detailed and correct diagnosis of the Great Recession, allow me to recommend a book that has just been released by Tim Congdon (ed.), Money in the Great Recession: Did a Crash in Money Growth Cause the Global Slump. Among others, I contributed the chapter on the U.S. “The Basel Rules and the Banking System: An American Perspective.”
5. Question: Where are we now?
Answer: Aggregate demand, which is represented by Final Sales to Domestic Purchasers in the U.S. is shown below. As can be seen, we had the Great Recession, and we remain, ten years after the start of the slump, in a growth recession. We are growing, but still growing at below the trend rate of growth. Thanks to Washington’s regulatory zeal that has kept bank credit (the major contributor to broad money, accounting for over 80% of its total) squeezed. Yes, during a growth recession the U.S. has endured a credit crunch (read: thanks to government failure). If we look at the money supply growth, measured by M3, it remains “slow” and has been slowing down slightly, as the Fed starts a “tightening” cycle. In addition, there is a considerable amount of regime uncertainty in Washington, D.C. Both of these factors pose cause for concern. Indeed, there will probably be no “Trump Boom.”
6. Question: Where should one invest?
Answer: This is always a difficult one to answer. That said, for the risk averse investor, I like Treasury Inflation Protected Securities (TIPS). Inflation expectations will eventually start to change from deflationary to inflationary, and when they do, TIPS, which are mispriced at the present, will generate a nice capital gain. For those with larger risk appetites, there are several special situations available. For example, one promising case is represented by distressed debt in India. Lastly, there are always mispriced equities out there for the picking. That is, if you have the right valuation methodology, which I think I do. Indeed, by applying my “Probabilistic Discounted Cash Flow Model,” which I have developed over the past 25 years, my class at Johns Hopkins, over the past two years, has been able to pick stocks that have generated returns that are almost double those of the S&P 500.Steve Hanke is Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Member of the OMFIF Advisory Board.
Christopher A. Preble
North Korea backed away modestly from its threat to surround Guam with a ring of fire on Monday, a surprising de-escalation in the war of words that seemed late last week to be building toward an actual armed conflict. The Wall Street Journal provides a useful timeline of the crisis here.
In the accompanying story, the Journal noted that Pyongyang made its announcement “hours after China took its toughest steps against Pyongyang to support U.N. sanctions,” including a pledge to “ban imports of North Korean coal, iron and seafood.”
It is possible that such economic pressure convinced the DPRK to rethink its approach. But a less-noticed Chinese statement might have had a bigger impact—both on Pyongyang, and hopefully here in Washington.
Last Friday, China’s Global Times explained that Beijing should not come to North Korea’s aid if the hermit kingdom launches missiles against the United States, but that China wouldhave North Korea’s back if it was the victim of U.S. or South Korean aggression.
As the Washington Post noted, the “comments reflect the 1961 Sino-North Korean Treaty of Friendship, Cooperation, and Mutual Assistance, which obliges China to intervene if North Korea is subject to unprovoked aggression—but not necessarily if Pyongyang starts a war.”
The Global Times’ editorial, believed to reflect official Chinese government policy, clarifies the frequently muddled difference between preemption and prevention. The former is a legitimate right of self-defense. The latter is functionally indistinguishable from aggression.
A country that has knowledge of a direct and imminent threat to its citizens is not obligated to wait until after the missiles fly or the bombs fall before taking action. If a country launches a war in order to prevent a future threat from materializing, however, such actions are likely to be roundly criticized—and, in this case, would activate the Sino-North Korean alliance. Make no mistake: China was issuing a deterrent threat to both the United States and North Korea.
The distinctions between preemption and prevention frequently become blurred, and are often deliberately misconstrued. In his speech at West Point in 2002, for example, President George W. Bush said that Americans had “to be ready for preemptive action when necessary to defend our liberty and to defend our lives,” but the war he launched in Iraq less than ten months later was a classic case of preventive war. Bush used military force to overthrow Saddam Hussein’s government, not because he had evidence of an imminent attack against the United States, but “to disarm Iraq, to free its people and to defend the world from grave danger.”
Of course, Bush’s father had attacked Iraq twelve years earlier, but he had launched that war to reverse Iraqi aggression against Kuwait. Not so surprisingly, the first Gulf War enjoyed broad international backing. Bush 43’s Iraq War, by contrast, engendered strong opposition abroad.
Mindful of the reaction that naked aggression is likely to evoke, many past leaders and rabble rousers have capitalized on minor incidents as a pretext for war (think, for example, of James K. Polk and Zachary Taylor in Texas, 1846; William Randolph Hearst and “ Remember the Maine” in 1898; and LBJ and the Tonkin Gulf in 1964).
Still others have manufactured bogus cases of aggression by others. In September 1931, Japanese soldiers planted explosives near a Japanese railway in Mukden (Shenyang), China, and then used that as a justification for launching a notoriously brutal war. Adolf Hitler asserted that Poland started the war against Nazi Germany in late August 1939, a claim so transparently untrue—based on a series of false flag operations involving Germans dressed up in Polish army uniforms—that it is often forgotten. However, the fact that some of history’s most ruthless aggressors would go to such elaborate ends to create the appearance of having acted preemptively, as opposed to preventively, demonstrates the importance of that distinction.
The psychology of preemption versus prevention is equally relevant in interpersonal disputes. When schoolyard scuffles or battles between siblings break out, “He/she started it!” is usually the first thing that a teacher or parent hears. It is the critical piece of evidence to adjudicate guilt or innocence. To defend oneself is noble; to attack others is treacherous.
Alas, there are likely to be numerous instances in which U.S. and North Korean forces could come into contact in the near future. Donald Trump could seize upon any one of them, initiate a wider conflict, and claim that he was acting in self-defense (i.e. preemptively), in order to rally the public here at home, and fend off international criticism.
But if Trump is determined to launch a preventive war, in order to secure a quick win, or boost his flagging popularity, or merely because he doesn’t like the young punk with the bad haircut, he should tread carefully. China has clearly stated that it won’t sit idly by if the United States is responsible for starting a new war in Asia.Christopher Preble is vice president for defense and foreign-policy studies at the Cato Institute and the author of The Power Problem: How American Military Dominance Makes Us Less Safe, Less Prosperous, and Less Free.